How to reduce supply chain waste in FMCG
When too high waste can expose companies to profitability constraints but if waste gets out of control it might pose a threat to the continuity of the organization. in this blog post, we examine how companies in consumer goods can reduce waste to achieve better profitability and resilience
WHAT ARE THE THREE SUPPLY CHAIN WASTE TYPES?
When talking about Supply Chain waste it is important not to make the mistake of thinking about inventory waste only. Inventory is where waste is more visible and the loss of inventory can result in missed opportunities and high COGS but inventory is not the only waste type that might affect the supply chain.
To better understand the consequences of supply chain waste and design solutions to reduce it, we can categorise waste into three main categories:
Inventory: Loss of inventory due to obsolescence, damages or scrappage of packaging/ raw materials due to inefficient production equipment are a few examples of how inventory can be wasted.
Resources: Waste of warehouse space, not filling trucks or containers in full, not making use of the company’s IT capabilities is how companies waste resources. Cash is also a resource that can go wasted when companies buy more inventory that the need.
Talents: Less visible yet even more harmful is wasting talents. Having qualified personnel spending time on large spreadsheets, managing documents via email or being micro-managed is a waste that, although it does not result in immediate losses, can seriously harm companies in the long term
IS A ZERO-WASTE SUPPLY CHAIN ACHIEVABLE?
Not all waste can be eliminated. Supply chains run on resources and there is always a degree of uncertainty about planning and forecasting. Uncertainty about demand forecast makes it almost impossible for the supply chain to run on zero waste but there are significant differences in terms of how much waste can be eliminated depending on the waste type.
Inventory waste is one of those categories that can be reduced to virtually zero. Except for Food manufacture, farming and dairy, companies with inventory that does not have shelf-life constraints can achieve the goal of a zero-waste of inventory.
Resource waste is harder to eliminate; companies often need to balance the usage of resources like trucking space to ensure there is no risk of wasting inventory.
Talent is probably the waste category that companies can eliminate without making any compromise on costs, availability, and customer’s service level. Eliminating the waste of talent is a long-term investment and a strategy to drive efficiency across the supply chain that pays back in the long term.
ALIGN SUPPLY CHAIN TO BUSINESS STRATEGY
Tactical waste reduction initiatives can harm a company if the supply chain is not aligned to business strategy. Identify the waste category to be reduced, define the maximum wastage level that the company can tolerate and agree on how to reduce it are all part of a plan that requires alignment to the business strategy.
When the supply chain is not aligned to business strategy companies are exposed to risks of prioritising initiatives that, although beneficial in the short-term, might preventing the company to meet their strategic objectives. This is an example from one on my clients:
The company needed a system to receive orders from a large retailer and went on the market for an EDI solution [more on EDI in this article]. The supply chain director received a few quotes and decided for the most convenient solution which was 40% cheaper compared to the other providers because the solution was not fully integrated with the company core system.
As the company expanded their presence in the retail market more customers required an EDI connection and the time required to process data manually to get data from and to the EDI and the company core system resulted in extra admin time, risks of data corruption and lack of visibility due to delays in the data processing.
What was seen to be an opportunity for a cost-saving initiative resulted in higher costs in the long term that could have been avoided if the supply chain director made a decision based on the company plan to work with more retailers, therefore, a fully integrated EDI connection, although more expensive in the short term, would have resulted in lower waste of talent and resources.
HOW TO DESIGN LOW-WASTE SUPPLY CHAIN PROCESSES
Waste reduction is a strategy to reduce costs and increase profitability. The first step to achieve waste reduction is to go back to the drawing table and design leaner processes.
Companies that are successful in running lean supply chains can look at a process from multiple angles and understand what to change and how depending on the waste goals. A common approach to process design is to start from a SIPOC diagram that describes the process:
Anybody who provides an input that creates a need to start a process: A Supplier can provide information and data, not only goods. For example, the sales team, when providing a quote for a new customer is considered a supplier in a SIPOC diagram
Information or goods that once received, initiate the start of a process: documents like quotes or sales and purchase orders can be inputs like a vehicle accessing the loading bay, an employee calling in sick or an alert about malfunctioning equipment.
The actual process with a start and an end. The process should describe business as usual and have a clear start and an end that is the start of the next iteration; the sequence will approach some endpoint or end value. Each repetition of the process is a single iteration, and the outcome of each iteration is then the starting point of the next one. Process design must approach each iteration separately as those have different suppliers and inputs. The risk of mixing different iterations is to lose visibility of which iteration is causing the inefficiency.
The output is the endpoint of a process iteration. The output must be measurable qualitatively and quantitively.
The customer of a process is whoever receives the output. Customers can be finance teams for a capital expense approval process or a customer refund. Customers in process design can be the supplier of goods in the purchasing process.
When each process is defined with a SIPOC diagram it is easy to identify a lean design against a process that generates waste due to inefficiency. One of the first insights that a SIPOC diagram can expose is the duplication of work. If users are losing time copying and formatting data that is the output of a process for customers other than what described in the SIPOC diagram, the process is faulty as it fails to include all the customers in one single workflow.
REDUCE INVENTORY WASTE
Inventory can be wasted across many steps of the supply chain, the first and probably the most important place where inventory waste can be reduced is in the purchasing phase.
Purchasing excess of inventory is the main cause of wastage due to obsolescence. Leaner purchasing processes should allow users to forecast more accurately starting from better input – sales and other data used to get future sales projections.
Another area where inventory is wasted is during transport, storage, and distribution. Improving logistics processed to minimize waste can include clear handling instructions, repacking goods to make packaging sturdier and safer or include a minimum order quantity check in the sales process so that boxes are not opened to fulfil the order.
REDUCE TALENT WASTE
Talent is wasted when skilled users are engaged in low-value activities. Activities that are necessary to complete a process but add no value to the customer should either be eliminated or automated. Low-value tasks can be downloading and saving files, reformatting data, create and share reports manually using spreadsheets and email attachment are all examples of low-value activities.
A common misconception is that manual tasks are all low value. Manual labour can be of high value for example when samples of products are taken for quality control or when products should be repackaged to fit customers’ requirements of for cross-selling.
REDUCE RESOURCES WASTE
A waste of resources happens when assets are not fully used: vehicles travelling below full capacity, or warehouse space not maximised. Manufacturing equipment running below expected productivity due to poor maintenance or having employees travelling unnecessary distance between one pick location to the next are all example of how resources can be wasted.
Waste of resources is not always easy to identify but with a SIPOC diagram that includes clear measures of input and output supply chain teams can get visibility of where the waste occurs; this is the first step to defining a waste-reduction strategy that is based on a programmatic approach rather than engaging in tactical tasks based on guessing and common sense.
Waste reduction is Supply Chain is not an easy task. Most executives simply use common sense when approaching efficiency improvements to lower waste but a tactical approach that does not include overall business goals might result in further inefficiencies. A more programmatic approach taken from Lean Six Sigma can deliver real benefits in terms of efficiency and waste reduction while enabling a supply chain that can run on low waste while creating value for the end customer and give the organization a competitive edge.